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Designated market value

13) Designated market value

A. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.
B. may sometimes exceed net realizable value.
C. should always be equal to net realizable value.
D. should always be equal to net realizable value less a normal profit margin.

14) When the direct method is used to record inventory at market

A. there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale.
B. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements.
C. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.
D. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold

15) The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their

A. selling price will be less than their replacement cost.
B. cost will be less than their replacement cost.
C. replacement cost will be more than their net realizable value.
D. future utility will be less than their cost.

16) In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for $700,000. Before the December 31, 2006 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2006 will result in a credit that should be reported

A. as a valuation account to Inventory on the balance sheet.
B. as an appropriation of retained earnings.
C. as a current liability.
D. on the income statement.

17) The retail inventory method is based on the assumption that the

A. final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
B. ratio of cost to retail changes at a constant rate.
C. ratio of gross margin to sales is approximately the same each period.
D. proportions of markups and markdowns to selling price are the same.

18) The gross profit method of inventory valuation is invalid when

A. a portion of the inventory is destroyed.
B. there is no beginning inventory because it is the first year of operation.
C. there is a substantial increase in inventory during the year.
D. none of these.

19) The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to

A. the machinery account.
B. miscellaneous tax expense (which includes all taxes other than those on income).
C. a separate deferred charge account.
D. accumulated depreciation--machinery.

20) Which of the following is NOT a major characteristic of a plant asset?

A. Possesses physical substance
B. Acquired for use
C. Acquired for resale
D. Yields services over a number of years

21) Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be

A. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
B. capitalized as part of the cost of the new hotel.
C. capitalized as part of the cost of the land.
D. written off as an extraordinary loss in the year the hotel is torn down.

22) The period of time during which interest must be capitalized ends when

A. the asset is substantially complete and ready for its intended use.
B. the activities that are necessary to get the asset ready for its intended use have begun.
C. the asset is abandoned, sold, or fully depreciated.
D. no further interest cost is being incurred.

23) Which of the following costs are capitalized for self-constructed assets?

A. Materials and labor only
B. Materials, labor, and overhead
C. Materials and overhead only
D. Labor and overhead only

24) When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

A. the total interest cost actually incurred.
B. that portion of average accumulated expenditures on which no interest cost was incurred.
C. that portion of total interest cost which would NOT have been incurred if expenditures for asset construction had NOT been made.
D. a cost of capital charge for stockholders' equity.

25) When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the

A. par value of the stock.
B. market value of the stock.
C. book value of the stock.
D. stated value of the stock.

26) When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds NOT needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be

A. offset against interest cost incurred during construction.
B. recognized as revenue of the period.
C. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
D. used to reduce the cost of assets being constructed.

27) Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is

A. 8/8.
B. 11/12.
C. 9/12.
D. 8/12.

Solution Preview

To be used in combination with your text and other studying materials, for studying and reference purposes only:

13) Designated market value

A. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. <-- this is correct. This is the proper way to determine the designated market value.
B. may sometimes exceed net realizable value.
C. should always be equal to net realizable value.
D. should always be equal to net realizable value less a normal profit margin.

14) When the direct method is used to record inventory at market

A. there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale.
B. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements.
C. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.
D. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold <-- this is correct under the direct method.

15) The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their

A. selling price will be less than their replacement cost.
B. cost will be less than their replacement cost.
C. replacement cost will be more than their net realizable value.
D. future utility will be less than their cost. <-- this is correct. ...

Solution Summary

This solution provides the correct answers with explanations to the study questions listed. All questions are answered.

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